Jacob Morello contributed to this post.
This morning, the trustees of Social Security released their annual report, which includes an assessment of the program’s financial health. The Social Security actuaries estimate that under current law, the Old-Age and Survivor’s Insurance (OASI) Trust Fund will be depleted in 2034 (one year earlier than projected last year), while the Disability Insurance (DI) Trust Fund will be depleted in late 2016, unchanged from last year. If the OASI Trust Fund were authorized to allocate funds to the DI program after its trust fund’s exhaustion, the combined OASDI reserves would be depleted in 2033, also unchanged from the projections made one year ago. Recent news of falling deficits in the near term must not lull policymakers into a false sense of security. The nation’s structural fiscal problems remain challenging, as evident in the Congressional Budget Office’s (CBO) most recent long-term budget outlook.
The Social Security DI program faces immediate fiscal challenges, with an estimated trust fund exhaustion date of 2016. At that time, the program would only be able to pay 81 percent of benefits due. The program has grown significantly over the last decade, from 7.4 million beneficiaries in 2003 to 10.9 million in 2013. The program’s rolls have swelled in recent years as the working-age population has increased and baby boomers have aged, increasing their likelihood of developing disabilities. Moreover, the financial hardships and job losses associated with the Great Recession created added incentives for people to apply for federal assistance programs for which they may qualify, including DI. The gradual increase in Social Security’s full retirement age (on its way from 65 to 67) may have also impacted the rolls by extending DI eligibility to Americans over the age of 65, who are more likely to develop disabilities.
The Social Security Administration also has a substantial backlog of disability claims to adjudicate. The DI program still operates on the assumption that people with disabilities cannot work at all, and recipients face losing all of their benefits if they earn $1 over a low specified limit. As such, the program is ripe for reforms that could allow beneficiaries to work to the extent of their abilities while improving solvency and program operations.
The OASI program faces challenges of its own, and unless steps are taken to improve solvency, the trust fund will be depleted in the first half of the 2030s, at which point payroll and self-employment tax revenues will only be sufficient to cover about three-quarters of scheduled benefits. This story is largely one of demographics, as baby boomers transition from the workforce to retirement, reducing payroll tax revenues and increasing program expenditures. While there were 5.1 workers per beneficiary in 1960, that ratio has fallen to 2.8 in 2013 as fertility rates dropped, and medical technologies have extended life expectancies at age 65 by about five years while the full retirement age has increased by just one year since that time (to age 66 for workers retiring today).
Moreover, many Americans are nervous about their ability to be financially secure in retirement – and some have good reason to worry. The Employee Benefit Research Institute recently found that over 40 percent of baby boomers and members of Generation X are at risk of running out of money in retirement; low-income Americans are even more at risk. Like so many current retirees, many future retirees will rely heavily on Social Security for retirement income. How the imbalance between program revenues and benefits is resolved will be of especially great consequence for these Americans.
Viable solutions to restore the solvency of the OASI Trust Fund have been proposed by many, including the Bipartisan Policy Center’s Domenici-Rivlin Debt Reduction Task Force. BPC also recently launched the Commission on Retirement Security and Personal Savings to examine the state of retirement security in the U.S. and to make recommendations that would improve retirees’ financial outlook.
Reforms to ensure the sustainability of these vital programs will not be easy, but delay could necessitate more drastic and disruptive reforms to Americans who rely on Social Security. In order to maintain solvency if no action affecting contributions or benefits is taken before 2033, either the Social Security payroll tax rate would have to be increased by 30 percent – from its current level of 12.4 percent to 16.1 percent – benefits would have to be cut by 23 percent, or some combination of the two. These changes would place an enormous burden on either retirees or current workers, and could have broader adverse macroeconomic effects as well. While policymakers have foregone many opportunities to act in the past, there is still time; but we must initiate reforms within the next few years to avoid the need for more painful and immediate adjustments down the road.
Alex Gold contributed to this post.